Welfare Gains under Tradable CO 2 Permits * Larry Karp and Xuemei Liu

Transcription

1 January 18, 2001 Welfare Gans under Tradable CO 2 Permts Larry Karp and Xueme Lu Ths research was partally funded by a grant from the Insttute on Global Conflct and Cooperaton.

2 Introducton It s easy to understand the opposton to lberalzed trade n establshed markets: Domestc producers loose from ncreased foregn competton. It s harder to understand the opposton to creatng markets, ncludng nternatonal markets, where they currently do not exst. Many economsts and polcymakers have proposed establshng tradable carbon permts to decrease the cost of reducng global carbon emssons. Snce there currently are no enforceable celngs on emssons, the rght to emt carbon has no market value. Emssons permts are not commodtes. The usual forces that oppose market lberalzaton are obvously not present n ths (proposed) market. Envronmentalsts, who favor reducng carbon emssons, frequently oppose nternatonal trade n emssons permts. It s puzzlng that the group most n favor of a proposed change (reductons n emssons) s also the most opposed to a method of achevng that change cheaply (va trade). There may be a ratonal bass for ths opposton. The theory of the second best alerts us to the possblty that n a world wth dstortons, openng a new market may lower welfare. If there s a plausble second-best argument aganst trade n carbon permts, we have not found t. There s probably an emotonal bass for envronmentalsts' opposton to tradable permts. The envronmental problems we face are related to growth, whch s related to the exstence of lberal markets. A msunderstandng of the relaton between markets and polluton may lead some envronmentalsts to ncorrectly equate envronmental deteroraton wth market lberalzaton of any knd. Certanly there s a deep skeptcsm amongst envronmentalsts regardng the merts of markets. Economsts advance the usual abstract arguments n favor of markets to explan why nternatonally tradable permts would be helpful n achevng reduced carbon emssons. These 2

3 arguments are probably correct, but they are not convncng to people who are ll-dsposed towards markets n general. Economsts' nvolvement n the debate over tradable permts dffers from ther nvolvement n prevous debates over trade lberalzaton, e.g. durng the Uruguay Round of the GATT negotatons. In both cases, the fundamental argument for market lberalzaton s theoretcal. However, durng prevous trade negotatons, these theoretcal arguments were backed by many emprcal studes. Those studes attempted to measure, ether econometrcally or by means of smulaton, the trade and welfare effects of varous forms of lberalzaton. The valdty of these emprcal results s always debatable, but ther concreteness sometmes makes them persuasve. Although trade n carbon permts s potentally mportant, the possblty of ths trade has led to lttle emprcal work. The obvous explanaton for the absence of emprcal work s that the relevant market s mssng. The exstence of a world market for wheat makes t relatvely straghtforward to estmate supply and demand curves that can be used to study the effects of lberalzed trade n wheat. We cannot use the same procedure to study the effects of creatng a market where none currently exsts. Nevertheless, we do observe cross-country and ntertemporal varaton n carbon emssons, together wth changes n nputs such as captal and labor. We can use ths data to estmate a relaton between emssons and ncome, and thus obtan an estmate of the margnal value of carbon emssons n dfferent countres. These estmates enable us to compare the level of ncome when each country's emssons are restrcted to a gven level, wth the level of ncome acheved when the country s able to trade permts. The dfference n ncome s a measure of the welfare gans from trade. We also compare the amount of reductons n total emssons that could be acheved wth and wthout trade when 3

4 each country's ncome s held fxed at a gven level. Ths comparson may be especally nterestng to people who care more about reducng emssons than about ncreasng ncome. The conclusons from ths emprcal exercse are speculatve. However, they gve us an estmate of the magntude of the mportance of trade n carbon permts. The smplcty and transparency of our model s appealng. More complcated models, e.g. those based on optmzaton and engneerng estmates, do a better job of descrbng some aspects of the world. However, the complexty of these models makes ther conclusons dffcult to assess. In the followng, we estmate a system of smultaneous equatons n whch natonal ncome and CO 2 emssons are endogenously determned by country-specfc characterstcs, ncludng levels of captal, labor and technology. We vew polluton and GDP as jont outputs of a producton functon that depends on captal, labor and technology, varables, whch we treat as exogenous. We estmate a natonal revenue functon by regressng GDP on captal, labor, technology and emssons. Ths functon represents the effcency fronter between ncome and emssons, for gven levels of the exogenous varables. A country's envronmental polces and economc structure, whch we proxy usng per capta energy consumpton, determne the equlbrum level of GDP and of emssons. We use the estmated model to smulate prces and effcency gans under tradable emssons permts. We suppose that countres enter nto an nternatonal agreement whch allocates CO 2 emssons permts, and that ths agreement supersedes the mechansm that would otherwse determne the country's emssons (the pont on ts effcency fronter). The jont producton functon (whch depends on technology and factor endowments) has not been altered by the agreement. Thus, we can use the estmated revenue functon to determne the effect on GDP of a change n emssons. Ths functon mples a demand for emssons permts, whch we 4

5 use to calculate the prce of permts when trade s permtted. We smulate the effcency gans resultng from trade n permts. Background The Kyoto Protocol requres that ndustralzed countres reduce ther collectve emssons of greenhouse gasses by 5.2% of 1990 levels by the perod The country-specfc targets n the Kyoto Protocol may be dffcult for some natons to acheve. There may be consderable cross-country varaton n margnal abatement costs, and the strength of envronmental lobbes also dffers. Emssons Tradng, whch was proposed to enable sgnatores to acheve reductons effcently, allows developed countres to trade emssons credts amongst themselves. Ths trade makes sense only amongst those countres that have agreed to quotas, predomnately the OECD countres. We therefore nclude only these countres n our emprcal model. The US Acd Ran Program, whch allows trade n SO 2 emssons, s an mportant experment n tradable polluton rghts [9]. The US experence wth the SO 2 program suggests that trade n CO 2 permts could have consderable benefts. There have been many attempts to estmate the costs of reducng carbon emssons, and several attempts to synthesze the estmaton results. If countres were allowed to trade emssons quotas, the equlbrum prce would be determned by the costs of reducng emssons. We use the estmates from prevous costs studes as a bass for comparson of the estmates of quota prces that we obtan from a smple econometrc model. Nordhaus cte [7] collects estmates of margnal costs of abatement and estmates a relaton between these costs and the percentage reducton of emssons. Bohm and Larsen [1] use ths relaton to estmate the prce of tradable permts and the effcency gan for ntra-european trade. They estmate an equlbrum prce of $240 per ton of carbon f only Western European 5

6 countres trade. Includng the remanng OECD countres, Chna, Eastern Europe and the former Sovet Unon causes the estmated prce to fall to $33.5 per ton of carbon. Larsen and Shah [5] calculate the prce of emssons f all countres partcpate n trade ($58 per ton of carbon) and f only OECD countres partcpate ($181 per ton). The Emprcal Model We estmate a revenue functon and an emssons functon usng panel data for 24 OECD countres. 1 We assume that GDP and CO 2 emssons are jont products, produced by country-specfc factors: captal, labor and technology. Ths jont producton functon determnes the trade-off between emssons and GDP for gven levels of factors. We refer to ths fronter as the revenue functon. The second equaton s the emssons functon, whch determnes the equlbrum pont on the effcency fronter. To conserve notaton we suppress tme and country subscrpts n descrbng the model. The jont producton functon s F(Y,E) = G(C,K,L,T,Pop), where Y = GDP (measured n constant 1987 US$); E = Industral CO 2 Emssons (n kt,.e. thousands of metrc tons) 2 ; C s a country specfc dummy; K = Physcal Captal Stock (n constant 1987 US$); L = Labor force; T = Patent applcatons (a proxy for technology 3 ); and Pop = Country Populaton. We nvert the relaton F()=G() to obtan the revenue functon Y = f(c,k,l,t,pop,e), whch represents the 1 Karp and Lu cte [4] descrbe the data and provde a more complete report of the estmaton results. That paper also dscusses n detal the emssons functon and ts relaton to the lterature on the envronmental Kuznets curve. 2 These nclude emssons arsng from burnng fossl fuels and manufacturng cement, and contrbutons from other sold, lqud and gas fuels and gas flarng. The data also ncludes emssons from commercal and resdental sources, but not from changes n land-use [8], [10]. Ths data accounts for approxmately 94% of the measure of Total anthropogenc emssons excludng land-use change and forestry found n [2]. 3 Gardner and Joutz cte [3] dscuss the relatve merts of usng patent applcatons and R&D expendtures as proxes for technologcal nnovaton, and recommend the former. 6

7 feasble trade-off between ncome and emssons, for gven levels of the other varables. We dvde all varables (except the dummy) by Pop to obtan per capta varables, and estmate a loglnear relaton. The estmaton equaton for the revenue functon s y s = c +α 1 k s + α 2 l s + α 3 t s + α 4 e s + ε 1s. (1) Lower case varables y,k,l,t and e are logarthm of the per capta of the correspondng upper case varables, c s the country specfc dummy, ε 1s s the error assocated wth country n perod s, and the parameters α j, j =1, 4 are to be estmated. We vew Y and E as endogenous and we treat K, L, T and Pop as exogenous. These explanatory varables are stock varables. Thus, we treat ther levels as predetermned n a perod. We nclude the country dummy to account for countryspecfc varables such as arable land and cultural factors. The revenue functon descrbes the technologcal trade-off between emssons and ncome. A second relaton, the emssons functon, descrbes the socal trade-off between ncome and emssons. In prncple, the emssons functon should nclude varables whch proxy poltcal constrants (e.g., membershp n envronmental groups, relatve ncome of workers n drty ndustres). Much of ths knd of nformaton s not avalable for our sample. In an effort to mprove the specfcaton of the emssons functon and mantan dentfcaton, we nclude commercal energy use (kt of ol equvalent), N, as a regressor n the emssons functon. We vew N as a proxy for the structure of the economy,.e. an ndcaton of the opportunty cost of reducng emssons. We estmate a log-lnear specfcaton of the emssons functon e s = d +β 1 y s + β 2 n s + ε 2s. (2) 7

8 The varable n s s the log of per capta energy consumpton n country, year s, d s a constant, and ε 2s s the error term. Estmaton Results In order to provde a bass for comparson, we frst estmate equaton (1) usng ordnary least squares (OLS), and then jontly estmate equatons (1) and (2) usng three stage least squares (3SLQ). parentheses. Tables 1 and 2 report the OLS and 3SLQ results, respectvely, wth standard n Table 1: OLS Estmates of Equaton 1 Parameter Name Estmate α 1 (k = log of Captal).534 (0.024) α 2 (l = log of Labor).3385 (0.022) α 3 (t = log of Technology).0558 (0.006) α 4 (e = log of Emssons).0452 (0.013) R 2.99 Numbers n parenthess denotes standard errors Table 2: 3SLQ Estmates Parameter Name Estmate α 1 (k = log of Captal).517 (0.025) α 2 (l = log of Labor).287 (0.031) α 3 (t = log of Technology).0625 (0.007) α 4 (e= log of Emssons).106 (0.027) β 1 (y = log of GDP) (0.039) β 2 (n = log of Energy Consumpton) (0.038) Numbers n parenthess denotes standard errors. 8

9 Our parameter estmates for equaton (1) are comparable to the augmented Solow growth model estmated by Nonneman and Vanhoudt cte [6] for OECD countres. Ther estmated producton functon s Y = K LT H, where ther measure of technology, T, uses R&D expendtures and H s a measure of human captal. Our estmate of the elastcty wth respect to captal s larger, and our estmate of the labor elastcty s smaller, relatve to [6]. Although we use a dfferent varable to measure technology, our elastcty estmate s smlar to thers. Smulaton Results We use the structural model partcularly the revenue functon, equaton (1) to estmate the effect of trade n permts. It s convenent to rewrte ths equaton as Y = AE α wth A FPop σ ; σ ( 1 jα j) ; F 4 Σ exp( c ) 1 K α 2 L α 3 T α. (3) The postvely sloped sold curve n Fgure 1 shows the graph of the revenue functon for a partcular country n the year 1990, and the negatvely sloped sold curve shows the emssons functon. The ntersecton of these curves, pont x, represents the 1990 equlbrum. If factors of producton and populaton [and thus the varable A defned n equaton (3)] ncrease, then the revenue functon shfts out as shown by the upwardly slopng dashed curve n Fgure 1. INSERT FIGURE 1 HERE Capton: Fgure 1: Equlbrum wth and wthout quotas To reflect the vew that emssons would ncrease n the absence of an agreement, the dashed curve labeled E( YN ) represents the future (e.g., year 2010) emssons functon. The pont x s the equlbrum combnaton of emssons and ncome n the absence of an agreement to constran emssons. 9

10 An nternatonal agreement changes the regme that determnes the level of emssons. If the agreement restrcts emssons n the year 2010 to ts 1990 level, the country's level of ncome wthout trade s gven by the pont z. If a country receves an allocaton equal to ts 1990 emssons, but s able to trade permts, t can acheve a hgher level of ncome, such as the pont z. 4 When we use the model to calculate the equlbrum prce of tradable permts, we assume that the percentage ncrease n A over the perod s the same for all countres. That s, A,2010 = λ A,1990 for λ > 1. There s a smple relaton, descrbed below, between the equlbrum prce of permts and the value of λ. Therefore, n the next secton we report the smulated equlbrum prce under the (mplausble) assumpton that λ = 1. The reader can adjust these prces dependng on the value of λ that seems reasonable. The effcency gans due to trade are ndependent of the value of λ (.e., ndependent of the growth of factors of producton). Estmates of Prces and Effcency Gans Wth tradable emssons and perfect competton, the value of margnal product of emssons n each country equals the world prce of permts, denoted P. Usng equaton (3), country 's value 4 1 of margnal product (ts equlbrum nverse demand) for emssons s P α AE α =, whch mples the demand 4 E P = α4a α (4) 4 The horzontal coordnate of z represents the country's quota allocaton, whch dffers from ts actual emssons by the amount of trade. The vertcal coordnate represents the value of producton Y (E,λA) plus of the value of sales of quota lcenses. 10

11 Usng our 3SLQ pont estmate (Table 2) α 4 =.106, the elastcty of demand (both for a sngle country and for the aggregate of all countres) s Summng equaton (4) over and settng the result equal to the aggregate level of emssons E gves the equlbrum prce P ( E ) as the soluton to E P α =Σ E = α4a (5) Table 3 reports the smulated prce (1987 US$ per metrc ton of CO 2 ) when OECD aggregate emssons and country s factors (and thus A ) equal ther 1990 levels, usng the OLS and the 3SLQ parameter estmates. (Here we set λ =1.) The second row of the table reports the smulated prce for CO 2 ; and the thrd row converts ths nto a prce of carbon. 5 The prce estmates summarzed n Secton 2 refer to tons of carbon, so the thrd row of Table 3 should be used for comparson. Table 3: Smulated Prces Coeffcents OLS (Table 1) 3SLS (Table 2) prce per metrc ton of CO 2 $57.5 $156.8 prce per metrc ton of carbon $210. $ Fgure 2 graphs each country's 1990 margnal product of emssons n the absence of trade and shows the equlbrum prce (usng the 3SLQ estmates). The thrteen countres whose margnal product of emssons s hgher than the prce would buy permts. Swtzerland and 5 CO 2 has a molecular weght of (16) = 44. Thus the rato of the weght of CO 2 to carbon s =

12 Sweden have the hghest margnal product of emssons. Eleven countres, ncludng the US, gan from sellng permts. INSERT FIGURE 2 HERE The estmated equlbrum prce s prmarly useful as a means of comparng our results wth the prevous lterature. Our prce estmates (usng the assumpton λ =1) are substantally hgher than those we summarzed n Secton 2. The more nterestng economc queston concerns the welfare effects of allowng trade n permts. Fortunately, the answer to ths queston s ndependent of the value of λ. In order to estmate the effcency gan due to tradable permts, we compare a country's estmated GDP wth and wthout tradable permts, gven a quota allocaton equal to ts 1990 emssons level. Denote Y as country s GDP when t uses the effcent level of emssons, 4 [.e., the value gven by equaton (4)]. ( Y AE α ) E =. The value of ts exports of permts, gven an allocaton equal to ts actual 1990 emssons (E,1990 ) s P ( E E ) where,1990, P s the equlbrum prce from equaton (5). Under tradable permts country s total ncome s ( ) TP,1990. TP Y : Y = Y + P E E (6) 4 The estmated level of ncome wthout trade s Y = A E α. A measure of the effcency,1990,1990 gan due to trade s thus Y Y TP,1990,1990 Y,1990. Fgure 3 shows the effcency gans for the countres n our sample, usng the 3SLQ parameter estmates of equaton (1). For most countres the gans are below 2% of GDP; only three countres gan more than 3%. For some countres, e.g. Germany, the gan s neglgble; the Unted States gans 0.53%. The unweghted average of the gans for the 24 countres s 1.36%. 12

13 INSERT FIGURE 3 HERE The results above held A at ts (estmated) 1990 level. If A ncreases n the future (the tme at whch the quota becomes bndng) the equlbrum prce would be hgher. For example, suppose that A s replaced by λa, λ 1 to represent an ncrease n factors of producton and populaton. Usng equaton (4) and the equlbrum condton E =Σ E, t s easy to show that dp P dλ λ =. The estmated equlbrum shares and effcency gan are ndependent of λ (provded that 4 the value of λ s the same for each country). In the absence of trade, ncome s λ AE α Wth,1990. equal proportonal growth n A for all, each country's demand for emssons shfts up by the same amount, and ts equlbrum share wth trade remans the same. Snce the percentage TP ncrease n prce equals the percentage ncrease n λ, ncome under trade ( ) Y ncreases by the same proporton as ncome n the absence of trade: the effcency gan due to tradable permts s ndependent of λ. Estmates of Potental Reductons and Quota Shares Another way to measure the effcency gans of permt tradng s to calculate the maxmum addtonal reducton n emssons that can be acheved by allowng trade, wthout reducng ncome. If countres were to agree to lmt emssons to ther 1990 level, then ther estmated 4 future ncome, n the absence of trade, s λ AE α The parameter λ >1 represents the ncrease,1990. n ther factors of producton, relatve to 1990 levels. If the countres then agree to allow trade n permts, and attempt to reduce aggregate emssons, E below the 1990 level, the constrant that no country s worse off can be wrtten 13

14 AE α 4 λ + ( λ )( µ ) λ 4 P E E E AE α (7) ;,1990. Here µ s country s share of aggregate emssons. The frst term on the left sde of (7) s the value of domestc producton, gven the effcent level of emssons (a functon of P ). The second term s the value of net exports of permt. The equlbrum prce P ( ; ) to λ and the equlbrum values E λ s proportonal E are ndependent of λ. Therefore we can dvde both sdes of equaton (7) by λ and wrte the constrant on ncome as ndependent of the growth parameter λ. The optmzaton problem that determnes the new agreement s mn E, µ E, subject to Σ µ = 1, and equaton (7). (8) The equlbrum prce and each country's equlbrum use of emssons depend on E, but are ndependent of the allocaton of quota rghts. However, a country's ncome, and thus ts wllngness to sgn an agreement, does depend on the allocaton. The soluton to (8),.e. the mnmal level of E, s 8.06% lower than 1990 levels. 6 Thus, tradable permts makes t possble to acheve a sgnfcantly hgher reducton n emssons wthout a loss n ncome. Ths model probably overstates the actual gan, because t gnores transactons costs and adjustment costs whch would undoubtedly be assocated wth a reallocaton of emssons. Thus, our estmates of gans should be vewed as plausble upper bounds, rather unbased estmates. Fgure 4 shows: the actual shares of emssons n 1990; the equlbrum shares when aggregate emssons are fxed at 1990 levels and trade n permts s allowed (dentfed as Smulaton 1 ); and the optmal shares µ mpled by the soluton to equaton (8) (dentfed as 6 Recall that n the 1992 Framework Conventon on Clmate Change, ndustralzed countres set a target for the year 2010 at 1990 levels. The Kyoto Protocol set a target at 5.2% of 1990 levels. 14

15 Smulaton 2 ). Fgure 5 shows the levels of emssons n 1990 and when aggregate emssons are mnmzed. INSERT FIGURE 4 HERE Several countres (notably Japan and France) receve a share of quota rghts (µ ) less than ther actual share n However, they emt more under the equlbrum mpled by the soluton to equaton (8) than they dd n For the Unted States, on the other hand, the optmal quota share under the soluton to (8) exceeds t's hstorcal 1990 share, but the equlbrum share of emssons s lower. Thus, Japan and France are net buyers of quota rghts, and the Unted States s a net seller. The Cobb Douglas functonal form for ncome mples that a country's equlbrum share of emssons, E Σ je j, equals ts equlbrum share of ncome from producton, Y Σ jyj. Snce the Unted States has approxmately 35% of OECD GDP (n 1990), ts share of emssons s approxmately 35% for all the experments. Concluson We estmated a structural model to assess the effects of tradable permts for CO 2 emssons. One equaton n our model descrbes the relaton between GDP and factors of producton, ncludng CO 2 emssons. We vew these emssons as representng envronmental servces, the supply of whch s endogenous. The second equaton uses ncome and energy consumpton (a proxy for the structure of the economy) to explan the equlbrum supply of these servces. We assumed that an nternatonal agreement supersedes the mechansm that would, n the absence of the agreement, determne the endogenous supply of envronmental servces (the level of emssons). We used our estmated revenue functon to smulate the equlbrum prce and 15

16 effcency gans of tradable permts, gven a partcular level of aggregate emssons. Our estmated carbon prces are two or three tmes as large as prevous estmates, wthout accountng for growth n demand (due to growth n factors of producton). Some proposals am to reduce year 2010 aggregate emssons to 1990 levels. Our results suggest that an addtonal 8% reducton n aggregate emssons could be acheved, wthout ncome loss, by approprate dstrbuton of emssons rghts. Ths dstrbuton gves the Unted States a larger share than t's hstorc level, but the US exports permts, leadng to smaller US emssons. There are several lmtatons of our study. We gnore both adjustment costs, whch would requre a dynamc model, and also transactons costs. Therefore, our estmates of the gans from trade are more lkely to represent plausble upper bounds, rather than estmates of expected gans. The data lmtatons mean that we have been unable to nclude all of the explanatory varables that should deally be n the model. We used a systems estmator n an attempt to reduce the problem of endogenety of regressors, but the lack of data (.e., the lack of better nstrumental varables) means that ths problem has probably not been elmnated. We gnored other methods of reducng the costs of controllng stocks of greenhouse gasses, ncludng the U.S. proposal to obtan credts by usng carbon snks. The acceptance of ths proposal would reduce the U.S. margnal abatement costs. Our estmates suggest that U.S. margnal costs are already relatvely low, and that the U.S. would be a net exporter. Allowng the U.S. to receve credts for carbon snks would shft out ts export supply functon, reducng the prce of permts, and ncreasng the gans from trade. Despte these lmtatons, our approach has the vrtue of provdng a smple and easly understood means of addressng an mportant polcy ssue. Our estmates suggest that tradable 16

17 carbon permts could substantally reduce abatement costs. Consequently, proposals to allow ths trade should be serously consdered n nternatonal negotatons amed at reducng the dangers of global warmng. 17

18 References P. Bohm and B. Larsen (1994). Farness n a Tradable-Permt Treaty for Carbon Emssons Reductons n Europe and the Former Sovet Unon. Envronmental and Resource Economcs, 4(3): Buenos Ares press kt (1998). Fourth Sesson of the Conference of the Partes UN Framework Conventon on Clmate Change. T. Gardner and F. Joutz (1996). Economc Growth, Energy Prces and Technologcal Innovaton. Southern Economc Journal, 62(3): L. Karp and X. Lu (1999). Valung Tradable CO 2 Permts and OECD Countres. Workng Paper No. 872, Department of Agrcultural and Resource Economcs, Unversty of Calforna at Berkeley. B. Larsen and A. Shah (1994). Global Tradable Carbon Permts, Partcpaton Incentves, and Transfers. Oxford Economc Papers, 46: W. Nonneman and P. Vanhoudt (1996). A Further Augmentaton of the Solow Model and the Emprcs of Economc Growth for OECD Countres. Quarterly Journal of Economcs, 111(3): W.D. Nordhaus (1991). The Cost of Slowng Clmate Change: A Survey. The Energy Journal, 12(1): J.T. Roberts and P. Grmes (1997). Carbon Intensty and Economc Development : A Bref Exploraton of the Envronmental Kuznets Curve. World Development, 25(2): R. Stavns (1998). What Can We Learn from the Grand Polcy Experment? Lessons from SO2 Alloance Tradng. Journal of the Economc Perspectves, 12(3):

19 World Bank (1998). World Bank World Development Indcator, 1998 CD rom. 19

20 Y Y (E, l A ) z' x' Y (E, A ) z x E (Y, N' ) E (Y, N ) E Fgure 1: Equlbrum wth and wthout quotas

21 Fgure 2 Margnal Product of Emssons and Permt Prce $600 $500 $400 $300 $200 $100 $0 Iceland Luxembourg New Zealand Ireland Portugal Greece Norway Turkey Fnland Denmark Austra Belgum Sweden Swtzerland Australa Netherlands Span Canada Unted Kngdom Italy France Germany Japan Unted States Margnal Product of Emssons Permt prce

22 Fgure 3 Effcency Gans 7% 6% 5% 4% Gans 3% 2% 1% 0% Iceland Luxembourg New Zealand Ireland Portugal Greece Norway Turkey Fnland Denmark Austra Belgum Sweden Swtzerland Australa Netherlands Span Canada Unted Kngdom Italy France Germany Japan Unted States Effcency Gans

23 Fgure 4 Emssons: actual shares, effcent shares and optmal quota allocatons 49% 39% 29% shares 19% 9% -1% Iceland Luxembourg New Zealand Ireland Portugal Greece Norway Turkey Fnland Denmark Austra Belgum Sweden Swtzerland Australa Netherlands Span Canada Unted Kngdom Italy France Germany Japan Unted States Actual 1990 shares Shares under aggregate emssons mnmzed (Smulaton 2) Shares under aggregate emssons fxed (Smulaton 1)

24 Fgure 5 Emsson Reducton 5,000,000 4,500,000 4,000,000 3,500,000 Emssons (kt) 3,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 0 Iceland Luxembourg New Zealand Ireland Portugal Greece Norway Turkey Fnland Denmark Austra Belgum Sweden Swtzerland Australa Netherlands Span Canada Unted Kngdom Italy France Germany Japan Unted States 1990 emssons Effcent emssons under aggregate emssons mnmzed